Bank of America surprises with big Q1 profit, but news isn't all good

Bank of America (BAC) joined the parade of better-than-expected financial sector earnings this morning, posting a profit of $4.2 billion, or 44 cents a share, thanks largely to higher interest income and solid results from recently acquired Merrill Lynch.

Though the results beat analysts' projections -- they'd expected a 4-cents-a-share profit -- the news isn't all good: credit card losses rose and the company set aside more to cover bad mortgages. So will this be enough to take some of the heat off embattled CEO Ken Lewis?

He certainly has a lot riding on these results. Named "banker of the year" in 2008 by financial industry trade paper American Banker, he's now facing an uprising.

Two prominent firms that advise shareholders are urging them to remove Lewis from Bank of America's board at its annual meeting next week. And with the results of the government's stress tests nearing release, his assertions that the company won't need to raise additional capital may soon be tested.

While it's last fall's hasty acquisition of Merrill Lynch that's causing the most consternation among shareholders now, a few of Lewis' earlier takeovers are also wreaking havoc on Bank of America's bottom line: the $35 billion deal for massive credit card issuer MBNA in 2005 and the $4.1 billion purchase of mortgage giant Countrywide last year.

Like competitors JPMorgan Chase (JPM) and Citigroup (C), Bank of America reported much higher losses in its credit card business. Loan-loss provisions rose to $8.2 billion in the first quarter, up from $4.3 billion a year ago. The unit lost $1.8 billion, compared with a $867 million profit the first quarter of 2008, Bank of America said today. With some 40 percent of its net revenue last coming from cards, that's a worrying trend.

And while mortgage revenue nearly quadrupled after the Countrywide transaction, mortgage delinquencies are also spiking, so Bank of America is setting aside more money to cover loan losses -- $3.4 billion in the first quarter, to be exact. That's up nearly 90 percent. Overall, the mortgage division lost money despite the huge spike in revenue.

"Credit quality deteriorated further across all lines of business as housing prices continued to fall," the company said in a statement accompanying its results. Total loan loss provisions surged 57 percent to $13.4 billion.

With short-term interest rates much lower than long-term rates, it's much easier for companies like Bank of America to post positive results. And while Merrill Lynch and Countrywide did contribute to profit, the company suggested at least some of that was due to changes in accounting rules that allowed B of A to forestall further writedowns on so-called toxic assets. Only time will tell if it's enough to help Ken Lewis save his job.